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The Debt Deniers’ Fantasy

It’s not quite on a par with 9/11 truthers or Obama
birthers, but recently a number of liberal commentators have
descended into the fever swamps of denialism by rejecting the most
basic facts about our debt and deficit. Mind you, they are not
arguing about the best policies to reduce the debt — taxe
hikes vs. spending cuts — but actually denying that the
problem exists at all.

Paul Krugman, for example, pronounces the debt problem
“mostly solved.” Matt Yglesias of Slate asks,
“What sovereign debt crisis? There certainly isn’t one
in the United States.” Bruce Bartlett, every liberal
economist’s favorite former conservative, adds that
“our long-term budget situation is not nearly as severe as
even many budget experts believe.”

Bolstered by a study from the left-wing Center on Budget and
Policy Priorities, the debt deniers claim that a combination of
economic growth, tax hikes, and projected (but not yet realized)
spending reductions have already significantly reduced deficits.
They argue that a mere $1.2 trillion in additional tax hikes over
the next ten years, and the resulting savings on interest, would
enable us to “stabilize” our debt at a mere 73 percent
of GDP by 2022.

Now there’s something to get excited about: stabilizing
our debt at an amount equal to nearly three-quarters of the value
of all goods and services produced in this country each year.
Yippee!

But even if you think that’s good news, it’s not
really the truth. The 73 percent figure actually represents only
that portion of the federal government’s debt classified as
“debt held by the public,” primarily those U.S.
government securities that are owned by individuals, corporations,
and other entities outside the federal government itself. Debt held
by the public currently totals roughly $11.6 trillion and is
expected to rise to roughly $19.1 trillion by 2022.

Left out of this analysis, however, is roughly $4.9 trillion in
“intragovernmental” debt, which consists of the debts
that the federal government owes to itself, through more than 100
government trust funds, revolving accounts, and special accounts,
such as the Social Security and Medicare Trust Funds (worth $2.7
trillion and $344 billion respectively). The combination of debt
held by the public and intergovernmental debt yields our current
$16.4 trillion in total red ink.

The debt deniers justify ignoring intragovernmental debt on the
grounds that only debt held by the public competes with investment
in the nongovernmental sector. Moreover, while interest on debt
held by the public is paid in cash and creates a burden on current
taxpayers, intragovernmental-debt holdings typically do not require
cash payments from the current budget and don’t present a
burden on today’s economy.

Intragovernmental debt can also be considered somewhat
“softer” than debt held by the public, since the
government can control when and whether trust-fund debt is paid
through, for example, alterations to the Social Security benefit
formula.

Prominent liberals are
now insisting that we face no debt problem at all.

But the federal government, and deficit doves, cannot simply
write off intragovernmental debt as inconsequential. As opponents
of Social Security reform often argue when asserting the
program’s solvency, the securities held by the Social
Security Trust Fund are backed “by the full faith and credit
of the U.S. government.” Eventually the securities held by
the various trust funds and other accounts will have to be
redeemed, just as if intragovernmental debt were debt held by the
public. No matter how you treat intragovernmental debt today,
repaying it should be included in any projection of future
government spending.

Therefore, a fair accounting of our debt should include both
that held by the public and intragovernmental debt. By that
accounting, we currently owe 102 percent of GDP, and by 2022 our
national debt will be 118 percent of GDP.

Moreover, by cutting off the trend line in 2022, the debt
deniers ignore the enormous unfunded liabilities of Social Security
and Medicare, the costs of which will kick in mostly beyond this
limited budget window. According to Social Security’s board
of trustees, the discounted present value (the amount that would
have to be set aside today, earning 3 percent interest, in order to
pay future shortfalls forever) of that program’s unfunded
liabilities is more than $20.5 trillion. And, according to the most
optimistic estimates by the Obama administration itself, the
discounted present value of Medicare’s unfunded liabilities
is more than $42 trillion. And that is an estimate that assumes
Obamacare actually reduces health-care costs.

True, those obligations represent the “softest” form
of debt. But “soft” does not mean debt that can be
completely dismissed. According to generally accepted accounting
principles (GAAP), by which private corporations abide, promises to
pay future benefits are generally categorized as debt. After all,
those benefit payments are called for under current law, and it
would take congressional action to change them. Unless and until
Congress reforms Social Security and Medicare, those obligations
exist, but debt deniers are especially vehement in their opposition
to precisely such reform. By their very failure to reform Social
Security and Medicare, the deniers harden the program’s
future liabilities.

If we include all this debt — public debt,
intragovernmental debt, and unfunded liabilities — we
currently owe at least $79 trillion, 500 percent of GDP, and
perhaps as much as $127 trillion, 800 percent of GDP.

That said, these future liabilities will be paid not out of
today’s but out of future economic production, which will
inevitably be larger. Measurements of the discounted present value
of future liabilities are extremely sensitive to assumptions about
future interest/discount rates. Therefore, a better way to
calculate the true size of the national debt might be to measure
the share of a country’s future GDP that will be required to
finance that debt. By this measure, the United States faces a debt
equal to an additional 9 percent of its future GDP forever.

However, this may underestimate the tax burden required to pay
the debt, because a country’s tax base is only a fraction of
its GDP. Accordingly, the tax increases required to pay the debt
would need to be much larger as a percentage of the current tax
base than as a percentage of GDP. For example, the payroll-tax base
equals slightly less than one-half of GDP, implying that the 15.3
percent U.S. payroll-tax rate would have to be more than doubled to
pay our debt. Similarly, the income-tax base is roughly 36 percent
of GDP, meaning that revenue from income taxes would have to more
than double, requiring massive rate increases just to pay what we
owe.

Taxes at such levels would almost certainly depress both
investment and consumption, substantially slowing economic
growth.

Indeed, the debt is likely reducing economic growth already. The
International Monetary Fund looked at the relationship between debt
and economic growth, concluding that, from 1890 to 2000, countries
with high debt levels have consistently experienced slower economic
growth than those with low debt levels. Similarly, economists
Carmen Reinhart and Kenneth Rogoff concluded that countries with
debt totaling more than 90 percent of GDP have median growth rates
one percentage point lower than countries with lower debt levels,
and average growth rates nearly four points lower. The slow
economic growth that the United States has seen coming out of the
recession is likely due in part to our high levels of government
debt.

Perhaps this was all thought up by President Obama’s
Muslim Kenyan overlords to hide the Mossad’s role in 9/11,
but I sort of doubt it. The debt deniers’ argument is about
as unrealistic.